Credit Suisse Net Misses Estimates; Cost-Cut Goal Raised

A pedestrian is reflected in the windows of a Credit Suisse Group AG bank in Geneva. Credit Suisse reaffirmed in November its commitment to a fully-fledged investment bank after UBS AG said it would cut 10,000 jobs and shrink debt trading to focus on money management. Photographer: Valentin Flauraud/Bloomberg

Feb. 7 (Bloomberg) -- Credit Suisse Group AG, Switzerland’s
second-largest bank, raised its target for cost reductions for a
third time in seven months as it posted fourth-quarter earnings
that fell short of analysts’ estimates.

Credit Suisse will seek an additional 400 million Swiss
francs ($441 million) in cost savings by the end of 2015, on top
of 4 billion francs in planned cuts announced since 2011, the
Zurich-based company said today.

Chief Executive Officer Brady Dougan said in an interview
with Bloomberg Television that the measures the bank has already
taken put it in a position to “thrive” regardless of market
conditions. The company’s fourth-quarter net income of 397
million francs compared with a year-earlier loss and the 647.6
million-franc estimate of analysts surveyed by Bloomberg.

“We’re coming into 2013 very well positioned, having done
a lot of hard work of reducing costs, of reducing our risk-weighted assets,” Dougan, 53, said in the interview. “We
really have a business model that’s ready to perform I think
quite well and resiliently in 2013 and beyond.”

Credit Suisse was down 0.9 percent to 26.77 francs by 2
p.m. Before today, the stock had risen 59 percent over the past
six months, compared with a 26 percent gain in the 40-company
Bloomberg Europe Banks and Financial Services Index.

Capital Distribution

The bank proposed to pay 10 centimes in cash and 65
centimes in shares as its dividend for 2012 after letting
shareholders choose the previous year whether they wanted 75
centimes a share in cash or in stock to help the company build
up capital ratios.

Dougan foresees a “material distribution of capital” once
the bank meets its target for a capital ratio under Swiss
standards of 10 percent, he said in the interview. The ratio
stood at 9.4 percent at the end of 2012 and the company intends
to meet the goal in the middle of this year.

Credit Suisse reaffirmed in November its commitment to a
fully-fledged investment bank after UBS AG, the biggest Swiss
bank, said it would cut 10,000 jobs and shrink debt trading to
focus on money management. UBS earlier this week posted a net
loss of 1.89 billion francs after booking a fine for trying to
rig global interest rates and costs tied to the reorganization.

Pretax earnings at Credit Suisse’s investment bank amounted
to 298 million francs in the quarter, compared with a loss of
1.43 billion francs a year earlier. Revenues at the investment
bank fell 16 percent to 2.66 billion francs in the quarter from
the previous three months, with fixed-income revenues dropping
39 percent to 887 million francs.

Fixed-Income ‘Disappointed’

“Revenues and pretax profit from the investment bank was
clearly weaker than expected,” Teresa Nielsen, a Zurich-based
analyst at Vontobel with a hold rating on Credit Suisse, said in
a note to investors. “Especially fixed income disappointed. The
bank still needs to work on its capitalization and we expect
asset sales and derisking to continue.”

Credit Suisse said today it aims to lower the cost-to-income ratio at the investment bank to 70 percent in 2015 from
84 percent last year by cutting expenses and boosting revenue
through growth initiatives and a reduced drag from about $13
billion in risk-weighted assets the bank still needs to wind
down. The bank cut those risk-weighted assets from $48 billion
at the end of 2011.

So far in 2013, revenue has been “consistent with the good
starts we have seen to prior years,” said Dougan in the
statement. The bank has a “constructive” view on the global
economic outlook and its impact on business this year, he said
in the interview.

Wealth Management

He has said he expects the profit contribution from the
investment bank to rebound as competitors reorganize and markets
improve. The unit, which contributed about 33 percent to the
group’s pretax earnings in 2012, should be making about half the
profits in the future, he said in November.

The bank also combined its wealth management, corporate and
institutional clients and asset management units in one division
to save costs and improve cooperation. The combination will lead
to the additional 400 million francs of savings announced today.

Pretax earnings at this combined division rose 71 percent
to 911 million francs in the fourth quarter as costs fell and
revenues from the asset management and corporate and
institutional client units rose.

Shrinking Margins

Revenues in wealth management are under pressure from
subdued client activity, low interest rates and withdrawals of
funds by rich clients from markets such as western Europe. Gross
margin, which reflects how much the bank makes in revenue on
assets it oversees, fell to 110 basis points in the quarter from
115 basis points a year earlier. A basis point is one hundredth
of a percentage point. UBS also reported narrower gross margins
when it published results earlier this week.

Credit Suisse’s wealth management clients added a net 2.9
billion francs in new funds in the quarter, below analysts’
forecasts for 5 billion francs, restrained by 4.4 billion francs
of outflows in western Europe. Dougan told analysts on a
conference call that the bank expects as much as 20 billion
francs in further outflows over the coming two to three years.

Credit Suisse foresees net new money in wealth management
of 3 percent to 4 percent of total assets under management
annually from this year through 2015, below the long-term target
of 6 percent, as outflows from the western European cross-border
business may amount to 5 percent to 10 percent of assets.

Board Nominations

“Wealth management net new money continues to disappoint
with wealth management margin also on the disappointing side,”
Cormac Leech, a London-based analyst at Liberium Capital Ltd.,
said in a note. He has a hold recommendation on the stock.

Credit Suisse agreed last month to sell its exchange-traded
funds unit with $17.6 billion in assets under management to
BlackRock Inc. after deciding that it won’t be able to expand
the business quickly enough to make it profitable. The bank also
said in July it would seek to sell two private-equity units to
comply with new limits on investments in hedge funds and
private-equity funds.

The bank proposed the election of Kai S. Nargolwala to the
board of directors at the company’s annual general meeting on
April 26. Nargolwala was a member of Credit Suisse’s executive
board and the CEO of the Asia-Pacific business from 2008 to
2010, after which he was the chairman of the business in the
region until 2011.

Credit Suisse will also propose the re-election of Jassim
Bin Hamad J.J. Al Thani and Noreen Doyle to the board, while
Robert H. Benmosche, Aziz R.D. Syriani and David W. Syz will be
retiring due to the statutory age limit.